State Bank Of India And Ors vs Renu Soni And Ors

P.K. Bhasin, J

This is yet another case coming up before this Tribunal in an appeal of a Bank where the DRT has given relief to a defaulter/guarantor contrary to the law laid down in various decisions of the Hon'ble Supreme Court.

The appellant Bank is aggrieved by an order passed by Dr. Rekha G. Dhakar, Presiding Officer of Debts Recovery Tribunal-I, Delhi (DRT) on 12.2.2016 disposing of the Securitization Application (SA) No. 41/2013 filed by the respondent No. 1/guarantor herein under Section 17(1) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ('SARFAESI Act' in short) with a direction to the appellant Bank not to take possession and sell the appellants' residential property in Vasant Kunj, New Delhi, which she had mortgaged in favour of the appellant Bank, until the, non-residential properties in Punjab belonging to the principal borrower, respondent No. 2 herein, in which Company her husband was one of the Directors, and which properties already stood taken over by the Bank are sold and the sale proceeds thereof are found to be insufficient to liquidate the outstanding dues payable by the borrower Company in its loan accounts with the appellant Bank.

The relevant background facts leading to the filing of the S.A. by the respondent No. 1 and passing of the aforesaid direction to the Bank by the DRT are re-produced below:

"1. This securitization application has been filed by the applicant under Section 17 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 read with Security Interest (Enforcement) Rules of 2002 with the prayer to restrain the respondent Bank to take any action against the property of the applicant situated at Flat No. C-8/8576, Ground Floor, Sector-C, Pocket-8 Vasant Kunj, New Delhi and also to restrain the officials of respondent Bank from taking possession of the aforesaid property.

Brief facts as mentioned in the present S.A. are that the applicant has admitted the availment and disbursal of various loan facilities in favour of respondent No. 3 by the respondent Bank. The applicant has also admitted the creation of equitable mortgage of aforesaid properly in favour of the respondent Bank in order to secure the various credit facilities granted to respondent No. 3. However, the applicant has challenged the impugned possession notice issued by the respondent No. 1 Bank on the following grounds:

(i) That the impugned property is only the sole residential house of the applicant.

(ii) That the respondent Bank has not properly dealt with the reply submitted by the applicant under Section 13(3A) of the SARFAESI Act to the demand notice.

(iii) That the respondent Bank has failed to restructure/rehabilitate the account of respondent No. 1 despite repeated assurances.

(iv) That the proposal submitted by the respondent No. 3 for selling the furnace, vacant plot and pipe unit was rejected by the Bank without any rhymes and reasons.

(v) That the assets of respondent No. 3 were more than the outstanding liability of respondent Bank and the impugned property is the only residential house available to the applicant and the entire amount of the Bank would be recovered from sale of other assets of respondent No. 3.

The respondent Bank has filed its reply to the present SA vehemently denying the allegations levelled against the Bank. It has been submitted that various credit facilities were advanced by the Bank in favour of respondent No. 3 and in order to secure the same, various properties were mortgaged with the Bank including the impugned property of the applicant. The applicant is also one of the guarantors of respondent No. 3 company. The respondent No. 3 failed to maintain the financial discipline of respondent Bank and the account was declared as NPA on 18.6.2012. As per the demand notice dated 21.12.2012, the total outstanding amount against the respondent No. 3 is Rs. 23,31,10,198.85 and as on date, the amount due is more than Rs. 28.48 crores.

........It has also been submitted that as per the present market value of the other mortgaged properties, the same are not sufficient to satisfy the claim of the respondent Bank. In nutshell, it has been prayed to dismiss the present S.A.

The respondent No. 3/borrower firm has also filed its reply to the present SA and have admitted the dues of the Bank. It has been submitted that the respondent Bank has already taken possession of the properties of respondent No. 3 vide possession notice dated 3.6.2013 and 4.6.2013 and the value of the properties in possession of the Bank are more than the amount due. It has also been submitted that the Bank be directed to restructure, the account.

I have given my anxious consideration to the various pleas raised by the applicant but did not find any substance in the same. The plea of the applicant that impugned property is the only residential house available with her and the respondent Bank be restrained from taking possession of the same is of no use, as the impugned property is mortgaged with the Bank to secure its dues. The Bank has categorically stated the value of other assets is not sufficient to satisfy its claim. Since the property is mortgaged with the Bank, the Bank cannot be restrained from selling the same to recover its dues.

The last plea of the applicant is that the assets of respondent No. 3 were more than the outstanding liability of respondent Bank............

Considering the facts and circumstances of the case, prima facie I find no force in the present S.A. and the same is liable to be dismissed. However, considering the fact that applicant is residing in the impugned property alongwith her family members and there are other secured assets available with the Bank to recover its dues, therefore, it is directed that till the other assets of borrowers are disposed off by the Bank, the possession of impugned property be not taken over by the Bank nor it be sold. In case if the entire dues of the Bank are not recovered from the sale of other mortgaged properties, the respondent Bank is held entitled to recover the same from the sale of impugned property.

At this stage when the order is pronounced, learned Counsel for the respondent Bank submits that though the Bank has taken the physical possession of other secured assets of the borrower company, however, they are not able to sell the same."

(highlighting is by me)

The grievance of the appellant Bank is that when the learned Presiding Officer of the DRT itself had come to the conclusion that the Security Applicant had no case entitling her to any relief the impugned direction to the Bank not to proceed to take physical possession of the property mortgaged by respondent No. 1 herein could not have been given under any circumstances and in fact the decision of the Presiding Officer to that that effect is totally perverse and not only that is in the teeth of various pronouncements of the Hon'ble Supreme Court to the effect that no guarantor can insist that the creditor should first exhaust its remedies against the principal and not to touch the properties of the guarantor till all the properties of the borrower are sold and sale proceeds are found to be insufficient to liquidate the dues of the creditor.

Learned Counsel for the respondents on the other hand simply maintained that the Presiding Officer of the DRT had committed no illegality in the facts and circumstances of this case where the Bank had already taken over physical possession of the properties owned by the principal borrower which had also been mortgaged in its favour but the Bank was not proceeding to sell those properties and was bent upon only dispossessing respondent No. 1 from her only residential house which is a small DDA flat where she is residing with her family.

The learned Counsel for the respondents, however, had nothing to say about the finding of the Presiding Officer of the DRT that applicant/guarantor/mortgagor there had no case in her favour since the fact that there were outstanding dues to the tune of over twenty crores recoverable from the principal borrower as well as the guarantors were admitted and which finding has not been impugned by respondent No. 1 or even by the principal borrower.

After giving my due consideration to the rival submissions 1 have no hesitation in accepting the submission of the learned Counsel for the appellant Bank that the impugned direction given to the Bank by the learned Presiding Officer not to touch the property mortgaged by respondent No. 1 herein (Security Applicant) till all the remedies are exhausted by the Bank to recover its money from the mortgaged assets of the principal borrower and it is unable to recover its dues from the sale proceeds thereof, in respect of which aspect the Bank's case is that no buyer is even coming forward to purchase those properties in Punjab, is totally unsustainable. Giving of such a direction by the Presiding Officer to the Bank despite coming to the conclusion that the Security Applicant had failed to show that she was entitled to any relief can be said to be a perverse decision and as was the submission of the Counsel for the appellant Bank also. Giving of such a direction has virtually resulted in grant of the relief to the Security Applicant which she had been found to be not entitled to by the Presiding Officer. Not only that the Presiding Officer has in effect totally stalled the recovery of even that amount which could be fetched by sale of the guarantor's property since for other properties of the principal borrower no person has been coming forward to buy the same. The Presiding Officer failed to appreciate the fact that in such like commercial transactions where the borrowers after availing of loan facilities from the public exchequer to the tune of crores of rupees sympathy has no role and the defaulters have to be dealt with sternly. In the present case the Presiding Officer of the DRT has virtually given the relief to the Security Applicant/guarantor totally ignoring the judgments of the Apex Court that creditors cannot be directed to recover their loans in a particular way since the liability of the borrowers and the guarantors is co-extensive. So, just because the Security Applicant was residing in the property which she had mortgaged with the Bank knowing fully well at the time of creation of equitable mortgage that one day it could be taken over also from her by the Bank in the event of the borrower Company failing to repay the loan amounts the Presiding Officer could not have taken into consideration that fact and given relief to her.

At this stage I may refer to some of the pronouncements of the Hon'ble Supreme Court wherein it was held that guarantors cannot dictate the creditors as to how to proceed to recover their moneys. Way Back in the year 1968 in the case of Bank of Bihar Ltd. v. Damodar Prasad & Anr., 1968 (SLT Soft) 304 : 1969 (1) SCR 62 the Hon'ble Supreme Court was called upon to decided as to whether a guarantor could ask for postponement of recoveries from him till remedies stood exhausted against the principal borrower and the Court dealt with the question in the following manner:

"The plaintiff Bank lent moneys to defendant No. 1 Damodar Prasad on the guarantee of defendant No. 2 Paras Nath Sinha. On the date of the suit Damodar Prasad was indebted to the plaintiff for Rs. 11,723.56 on account of principal and Rs. 2,769.37 on account of interest. In spite of demands neither he nor the guarantor paid the dues. The plaintiff filed a suit against them in the Court of the Subordinate Judge, 1st Court, Patna, claiming a decree for the amount due. The Trial Court decreed the suit against both the defendants. While passing the decree, the Trial Court directed that the 'plaintiff Bank shall be at liberty to enforce its dues in question against defendant No. 2 only after having exhausted its remedies against defendant No. 1'. The plaintiff filed an appeal challenging the legality and propriety of this direction. The High Court dismissed the appeal. The plaintiff has filed the present appeal after obtaining a certificate.

...........Neither the principal debtor nor the surety discharged the admitted liability of the principal debtor in spite of demands. Under Section 128 of the Indian Contract Act, save as provided in the contract, the liability of the surety is coextensive with that of the principal debtor. The surety became thus liable to pay the entire amount. His liability was immediate. It was not deferred until the creditor exhausted his remedies against the principal debtor.

Before payment the surety has no right to dictate terms to the creditor and ask him to pursue his remedies against the principal in the first instance. As Lord Eldon observed in Wright V. Simpson (1). 'But the surety is a guarantee; and it is his business to see whether the principal pays, and not that of the creditor.' In the absence of some special equity the surety has no fight to restrain an action against him by the creditor on the ground that the principal is solvent or that the creditor may have relief against the principal in some other proceedings......................Likewise where the creditor has obtained a decree against the surety and the principal, the surety has no right to restrain execution against him until the creditor has exhausted his remedies against the principal..................................................."

Then in Industrial Investment Bank of India v. Bishwanath Jhunjhunwala, Civil Appeal No. 4613 of 2000 decided on 18 August, 2009 same point came to be examined by the Apex Court and same view was taken as was taken in the above referred judgment in Damodar Prasad's case. The relevant portions from this judgment are extracted below:

"2. Briefly stated the facts are as follows:

The appellant Industrial Investment Bank of India Ltd. (hereinafter referred to as 'the appellant') on 27.9.1994 sanctioned the first short term working capital loan of Rs. 3 crores in favour of Modern Malleables Limited (hereinafter referred to as 'the borrower company').

The loan agreement was entered into between the appellant and the borrower company on 3.10.1994 in respect of the first short term working capital loan of Rs. 3 crores. The said loan agreement was signed on behalf of the borrower company by the respondent as a Director of the borrower company. On the same day, demand promissory note for Rs. 3 crores was executed on behalf of the borrower company in favour of the appellant. The same was executed on behalf of the borrower company by the respondent as the Director of the borrower company. A deed of undertaking to create mortgage in respect of its various immovable properties was also executed on behalf of the borrower company by the respondent.

A deed of personal guarantee was executed by the respondent on 3.10.1994 in respect of the said loan granted by the appellant in favour of the borrower company.........

The borrower company committed defaults in the payment/repayment of the principal amount of the loan as well as interest......

A notice was issued on 20.3.1997 to the respondent invoking the personal guarantee given by him and calling upon him to pay the sum of Rs. 5.40 crores together with further interest and liquidated damages from 1.1.1997 till repayment.

The appellant on 17.7.1997, filed an application against the respondent under Section 19 of the Recovery of Debts Due to Bank and Financial Institutions Act, 1993 in the Debts Recovery Tribunal, Calcutta. The appellant in the said application has prayed for a certificate against the said respondent for a sum of Rs. 5.40 crores along with further interest and liquidated damages.

The respondent on 20.3.1998 also filed an application in the Debts Recovery Tribunal, Calcutta for stay of further proceedings in the case filed by the appellant in the same Tribunal, inter alia, on the ground that the rights of the appellant against the respondent as guarantor did not crystallize till the rights of the appellant against the borrower company are established.

The Presiding Officer of the Debts Recovery Tribunal, Calcutta on 18.5.1999 relying on State Bank of India v. Indexport Registered & Others, AIR 1992 SC 1740 dismissed the application filed by the respondent for stay of further proceedings in the case filed against him and held that the appellant cannot be forced to exhaust remedy elsewhere and then to proceed against the guarantor and further that the liability of a guarantor is co-extensive with that of the principal debtor.

The respondent on 29.5.1999 filed an application under Article 227 of the Constitution of India in the High Court of Calcutta against the order dated 18.5.1999 passed by the Debts Recovery Tribunal, Calcutta.

The High Court of Calcutta by the impugned judgment allowed the application filed by the respondent under Article 227 of the Constitution of India and stayed further proceedings in O.A. No. 156 of 1997 filed by the appellant against the respondent in the Debts Recovery Tribunal, Calcutta. The appellant, against the said judgment/order has filed this appeal.

Mr. Gupta also submitted that the liability of the guarantor and the principal debtor are co-extensive and not in alternative........

Mr. Gupta, in support of his submission, placed reliance on a judgment of this Court in Bank of Bihar Ltd. v. Damodar Prasad & Another, (1969) 1 SCR 620. In that case, the Court referred to a judgment in Lachhman Joharimal v. Bapu Khandu and Tukaram Khandoji, (1869) 6 Bombay High Court Reports 241, in which the Division Bench of the Bombay High Court held as under:

"The Court is of opinion that a creditor is not bound to exhaust his remedy against the principal debtor before suing the surety and that when a decree is obtained against a surety, it may be enforced in the same manner as a decree for any other debt."

This Court, while approving the said judgment, observed that, "the very object of the guarantee is defeated if the creditor is asked to postpone his remedies against the surety. In the present case the creditor is a Banking company. A guarantee is a collateral security usually token by a Banker. The security will become useless if his rights against the surety can be so easily cut down."

In State Bank of India v. M/s. Indexport Registered (supra), this Court held that the decree holder Bank can execute the decree against the guarantor without proceeding against the principal borrower. Guarantor's liability is co-extensive with that of the principal debtor. In that case, this Court further observed that, "the execution of the money decree is not made dependent on first applying for execution of the mortgage decree. The choice is left entirely with the decree-holder. The question arises, whether a decree which is framed as a composite decree as a matter of law, must bo executed against the mortgage property first or can a money decree, which covers whole or part of the decretal amount covering mortgage-decree can be executed earlier. There is nothing in law which provides such a composite decree to be first executed only against the principal debtor. The Court further observed that "the liability of the surety is co-extensive with the principal debtor, unless it is otherwise provided by the contract".

The term 'co-extensive' has been defined in the celebrated book of Polock & Mulla on Indian Contract and Specific Relief Act, Tenth Edition, at page 728 as under:

"Co-extensive-Surety's liability is co-extensive with that of the principal debtor.

A surety's liability to pay the debt is not removed by reason of the creditor's omission to sure, the principal debtor. The creditor is not bound to exhaust his remedy against the principal before suing the surety, and a suit may be maintained against the surety though the principal has not been sued."

In Chitty on Contracts, 24th Edition, Volume 2 at page 1031 paragraph 4831 it is stated as under, "Conditions precedent to liability of surety- Prima facie the surety may be proceeded against without demand against him, and without first proceeding against the principal debtor."

The case of the respondent has never been that the liability of guarantor is only contingent and if remedies against the principal debtor failed to satisfy the dues of the decree holder, then only the Bank can proceed against the guarantor.

The legal position as crystallized by a series of cases of this Court is clear that the liability of the guarantor and principal debtors are co-extensive and not in alternative. When we examine the impugned judgment in the light of the consistent position of law, then the obvious conclusion has to be that the High Court under its power of superintendence under Article 227 of the Constitution of India was not justified to stay farther proceedings in O.A. 156 of 1997.

(Emphasis supplied by me)"

In the case of Union Bank of India v. Satyawati Tandon, III (2010) BC 495 (SC) : VI (2010) SLT 52 : (2010) 9 SCR 1, which case was also arising out of the proceedings under the SARFAESI Act it was observed by the Hon'ble Supreme Court as under:

"14. The question whether the appellant could have issued notices to respondent No. 1 under Section 13(2) and (4) and filed an application under Section 14 of the SARFAESI Act without first initiating action against the borrower i.e., respondent No. 2 for recovery of the outstanding dues is no longer res integra. In Bank of Bihar Ltd. v. Damodar Prasad, (1969) 1 SCR 620, this Court considered and answered in affirmative the question whether the Bank is entitled to recover its dues from the surety and observed:

"It is the duty of the surety to pay the decretal amount. On such payment he will be subrogated to the rights of the creditor under Section 140 of the Indian Contract Act, and he may then recover the amount from the principal. The very object of the guarantee is defeated if the creditor is asked to postpone his remedies against the surety. In the present case the creditor is Banking company. A guarantee is a collateral security usually taken by a Banker. The security will become useless if his rights against the surety can be so easily cut down."

In State Bank of India v. M/s. Indexport Registered and Others, (1992) 3 SCC 159, this Court held that the decree-holder Bank can execute the decree against the guarantor without proceeding against the principal borrower and then proceeded to observe:

"The execution of the money decree is not made dependent on first applying for execution of the mortgage decree. The choice is left entirely with the decree-holder. The question arises whether a decree which is framed as a composite decree, as a matter of law, must be executed against the mortgage property first or can a money decree, which covers whole or part of decretal amount covering mortgage decree can be executed earlier. There is nothing in law which provides such a composite decree to be first executed only against the [principal debtor]."

In Industrial Investment Bank of India Limited v. Biswanath Jhunjhunwala, (2009) 9 SCC 478, this Court again held that the liability of the guarantor and principal debtor is co-extensive and not in alternative and the creditor/decree-holder has the right to proceed against either for recovery of dues or realization of the decretal amount.

In view of the law laid down in the aforementioned cases, it must be held that the High Court completely misdirected itself in assuming that the appellant could not have initiated action against respondent No. 1 without making efforts for recovery of its dues from the borrower-respondent No. 2."

Since the DRTs deal with such like matters every day it cannot be accepted that the Presiding Officer of the concerned DRT in the present case was not aware of this legal position laid down by the Apex Court. In the judicial hierarchy of our country no Court/Tribunal can even think of ignoring the law laid down by the highest Court and so the impugned order giving relief to the surety that her property will not be sold till the properties of the borrower are sold cannot be sustained at all. Therefore, the appeal filed by the appellant Bank against the impugned order of the DRT has to be allowed and is hereby allowed and the direction given by the DRT in the impugned order dated, 12th February, 2016 to the Bank not to proceed against the property of the respondent No. 1 (guarantor/mortgagor) till properties of respondent No. 2 (principal borrower) are sold is set aside. Consequently the appellant Bank will now be, at liberty to take immediate possession of the property of respondent No. 1 and proceed to sell the same. In case, the appellant Bank is unable to take possession of the property in question within ten days due to any resistance by respondent No. 1 it will be at liberty to file an appropriate application before this Tribunal for ensuring that this decision of the Appellate Tribunal is given full effect to/executed and the Bank does not have to run from pillar to post to get that relief since without ensuring that result to the Bank complete justice will not be done. A copy of this order shall be circulated amongst all the DRTs coming under the jurisdiction of DRATs of Delhi and Allahabad.